In today's email we look at the latest REINZ House Price Index as well as warnings about the potential economic effects of a crackdown on migration.

1. House prices slipping

House prices edged lower in Auckland in June and are showing signs of slipping in the biggest surrounding cities, figures released by the Real Estate Institute yesterday showed.

The best measure of how prices are moving is the REINZ's House Price Index, which was designed in tandem with the Reserve Bank and removes the skew from more or less cheaper or expensive houses selling.

The details are in the table below, but it shows prices fell 0.5 percent in Auckland in June and are down 3.2 percent from their peak in late 2016.

Prices fell 0.4 percent in Northland and 0.5 percent in Bay of Plenty (Tauranga and Rotorua) in June. Waikato (Hamilton) still rose 1.1 percent to a new high during the month, but the overall New Zealand Index fell 0.3 percent in the month and was down 0.7 percent from its peak.

Economists though are still wary of predicting that this is the beginning of a sharp fall, with most seeing prices flattening out or edging lower. Most see Auckland's price fall limited to 5-7 percent.

Migration is still at record highs, interest rates are stable only just above record lows and the housing shortage in Auckland is nearly 50,000 and growing.

The political environment is also unlikely to scare the horses too much, with New Zealand First's Winston Peters on track to be in the kingmaker position in a National-New Zealand First Government from September 24. Peters may want to slash migration, but will struggle to achieve that quickly, and is opposed to any form of capital gains tax.

2. 'Migration cut would hit economy'

Infometrics warned this morning that rapid and big cuts to migration would lead to an economic slump because of labour shortages in key areas that would push up wage inflation and interest rates.

Chief Forecaster Gareth Kieran said in Infometrics' latest forecasts that economic growth would slip below two percent this year because of these labour shortages and a slowdown in construction spending.

"This problem will become more widespread if there is a significant and rapid tightening in migration policy following this year’s election," Kiernan said.

"Although growth is forecast to rebound during 2018, that pick-up is contingent on the continued supply of labour provided by foreign migrants coming to New Zealand for work, on which businesses have become increasingly dependent," he said.

“High levels of immigration have undoubtedly contributed to stresses around infrastructure and the housing market, particularly in Auckland. But employment growth of more than 1.0% per quarter over the last 18 months demonstrates the need for workers across the economy.

“Without these inflows of foreign workers and returning New Zealanders, businesses would have struggled to meet growing demand, and cost pressures would be even more intense in areas such as the construction and tourism sectors."

New Zealand First has pledged to cut net migration from over 70,000 per year to 15,000, while Labour has promised changes that aims to reduce net migration by 20,000 to 30,000 per year.

Kiernan said labour shortages worsened by a cut in migration would unleash wage pressures that could prompt an early monetary policy tightening by the Reserve Bank.

"The inflationary risks associated with these cost pressures would also be likely to compel the Reserve Bank to raise interest rates sooner than would otherwise be the case," he said.

“Given the slowdown already occurring in sales activity and house price growth, this potential cocktail of rising interest rates mixed with a government clampdown on migration would be lethal.

“Faster lifts in mortgage rates and debt-servicing costs would threaten a jump in forced house sales, hastening a correction in the housing market and hammering consumer confidence."

3. Looking for an exit strategy

Newsroom's National Affairs Editor Shane Cowlishaw has the exclusive this morning that the Government has quietly asked Corrections for some options on reducing a burgeoning prison population and is already looking to increase the size of a big new prison by a third.

The details on the options sought were redacted from the OIA documents obtained by Shane, but it's clear the surprise jump in prisoner numbers is putting the Government under intense pressure.

New Zealand’s prison populations sits at about 10,200, the highest it has ever been. Last year it was announced $1 billion would be spent building another 1800 prison beds, most of that going towards a new 1500-bed facility at Waikeria Prison in Waikato to open in 2020.

Corrections confirmed to Shane that it has briefed the Minister on the possibility of boosting Waikeria’s capacity by another 500 beds to 2000. No detailed costings or plans have been provided to the Government and the matter has not gone before Cabinet.

4. Numbers of the week:

Down 3.2 percent - That's the fall in Auckland house prices measured by the REINZ's House Price Index since its peak late last year.

5 percent - The support for Labour Leader Andrew Little as preferred Prime Minister in Colmar Brunton's July 1-5 poll for TVNZ. That was down three percentage points from the previous poll and puts him fourth behind Bill English on 26 percent (down three points), Winston Peters on 11 percent (up four points) and Jacinda Ardern on six points (no change). Labour's support fell three points to 27 percent, while National's support fell two to 47 percent. New Zealand First and Green both rose two points to 11 percent.

5. Quotes of the week:

New Zealand First (NZF) Leader Winston Peters in a speech in Tauranga on Thursday after Green Co-Leader Metria Turei called him racist:

"The Greens lashed us as racist and said they still wanted to work with us to form a government. We won’t forget that."

"If the Greens are not in government after September, our country will face either a Labour NZF or a National NZF government. Neither is acceptable to the Greens."

Green MP Barry Coates suggesting in a Newshub interview the Greens would force another election if Labour and New Zealand First tried to form a Government alone: "There is no automatic support that is provided for a Government under those circumstances."

6. Coming up...

New Zealand First holds its annual conference in Auckland on Saturday and Sunday.

The Green Party also holds a conference in Auckland on the weekend.

Statistics New Zealand will release June quarter CPI figures next Tuesday. Quarterly inflation is expected to drop from 1.0 percent in the March quarter to 0.1-0.2 percent in June because of a drop in fuel prices. That would drag annual inflation down to 1.9 percent from 2.2 percent.

Statistics New Zealand will release its General Social Survey on Wednesday.

7. Weekend Reads

Especially for subscribers, here's a few longer reads on economic, political and social matters for the weekend.

If you're looking for a good long sleep over the weekend, it may pay to read this piece from David Wallace Wells in New York Magazine on climate change in the morning rather than just before bedtime. It's a tad scary, It's titled 'The Uninhabitable Earth' and it's a sobering read full of startling facts.

The White House has had another awful week and the chaos inside Donald Trump's administration is laid bare in this New York Times piece from Maggie Haberman and Peter Baker. It sounds like Lord of the Flies inside that place. Here's a sample: "Now people close to the president and to his legal effort are engaged in a circular firing squad, anonymously blaming one another for the decisions of the last few days."

Frank Rich's summary of this week's events in New York Magazine is almost as good. "There will be no single smoking gun that will bring down this White House. It will be death by firing squad — or perhaps a sequence of firing squads — as the whole story inexorably pours out of the administration’s smoldering ruins. Trump Jr.’s panicked release of the self-incriminating emails is tantamount to picking up a loaded gun and shooting himself in the head," Rich writes.

"The problem is not that modern economics lacks the tools needed to understand the economy. Just as with firefighting, the basics have been well known for a long time. The problem is with the behavior and the incentive structure of the practitioners. There is overwhelming pressure to produce work that supports the status quo (i.e. redistributing to the rich), that doesn’t question authority, and that is needlessly complex. The result is a discipline in which much of the work is of little use, except to legitimate the existing power structure. In terms of the poor quality of work, it is easy to point to the failure to recognize the size and risks posed by the housing bubble in the last decade."

This piece from Arnold Kling in National Affairs also challenges the prevailing views of economists and asks: 'How effective is economic theory.'

Anyone trying to understand the rise of populism should have a look at this Ipsos Global Trends article based on a survey the firm did last year of over 16,000 people globally. It found alarming levels of distrust in Governments and elites.

This week America's major newspaper groups joined together to ask for an exemption from anti-monopoly rules so they could jointly negotiate with Google and Facebook. It's an echo in a way of our very own NZME-Fairfax merger. This WSJ Op-Ed on the matter summarises the issues well.

"The two digital giants don’t employ reporters: They don’t dig through public records to uncover corruption, send correspondents into war zones, or attend last night’s game to get the highlights. They expect an economically squeezed news industry to do that costly work for them," David Chavern writes. Too right.

8. Two fun things

Tweet of the day had to go to Mikey Ramone after Kid Rock announced he would run for Senate in Michigan: